UNITED STATES OF AMERICA BEFORE THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D.C.

UNITED STATES OF AMERICA

BEFORE THE

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

WASHINGTON, D.C.

 

VIRGINIA BUREAU OF FINANCIAL INSTITUTIONS RICHMOND, VIRGINIA

 

Written Agreement by and among   HAMPTON ROADS BANKSHARES, INC. Norfolk, Virginia   BANK OF HAMPTON ROADS Norfolk, Virginia   FEDERAL RESERVE BANK OF RICHMOND Richmond, Virginia   and   VIRGINIA BUREAU OF FINANCIAL INSTITUTIONS Richmond, Virginia

Docket No.  10-073-WA/RB-HC                                   10-073-WA/RB-SM

 

 

WHEREAS, in recognition of their common goal to maintain the financial soundness of Hampton Roads Bankshares, Inc., Norfolk, Virginia, ("Bankshares"), a registered bank holding company, and one of its subsidiary banks, the Bank of Hampton Roads, Norfolk, Virginia (the "Bank"), a state chartered bank that is a member of the Federal Reserve System, Bankshares, the Bank, the Federal Reserve Bank of Richmond (the "Reserve Bank"), and the Virginia Bureau of Financial Institutions (the "Bureau") have mutually agreed to enter into this Written Agreement (the "Agreement"); and

 

 

NOW, THEREFORE, Bankshares, the Bank, the Reserve Bank, and the Bureau agree as follows:

 

 

 

 

       (a)            The actions that the board of directors will take to improve the Bank's condition and maintain effective control over, and supervision of, the Bank's senior management and major operations and activities, including but not limited to, credit risk management, capital, liquidity, and earnings; and

       (b)           a description of the information and reports that will be regularly reviewed by the board of directors in its oversight of the operations and management of the Bank, including information on the Bank's adversely classified assets, allowance for loan and lease losses ("ALLL"), capital, earnings, and liquidity.

 

    3.                   Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank and the Bureau an acceptable written plan to strengthen credit risk management practices. The plan shall, at a minimum, address, consider, and include:

 

        (a)  The responsibility of the board of directors to establish appropriate risk tolerance guidelines and risk limits;

 

        (b)      periodic review and revision of risk exposure limits to address changes in market conditions;

 

        (c)  enhanced stress testing of loan portfolio;

 

            (d)  procedures to identify, limit, and manage commercial real estate ("CRE") concentrations that are consistent with the Interagency Guidance on

Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices, December 12, 2006 (SR 07-1).

             (e)      a schedule for reducing, and the means by which the Bank will reduce, CRE concentrations;

        (f)        strategies to minimize credit losses and reduce the level of problem assets; and

               (g)        management's monitoring and controlling of problem assets.

 

    4.                 The Bank shall not, directly or indirectly, extend, renew, or restructure any credit to or for the benefit of any borrower, including any related interest of the borrower, whose loans or other extensions of credit are criticized in the reports of examination of the Bank issued by the Reserve Bank on April 8, 2010 and January 25, 2010, and by the Bureau on November 20, 2009 (collectively, "Reports of Examination") or in any subsequent report of examination, without the prior approval of a majority of the full board of directors or a designated committee thereof. The board of directors or its committee shall document in writing the reasons for the extension of credit, renewal, or restructuring, specifically certifying that: (i) the Bank's risk management policies and practices for loan workout activity are acceptable; (ii) the extension of credit is necessary to improve and protect the Bank's interest in the ultimate collection of the credit already granted and maximize its potential for collection; (iii) the extension of credit reflects prudent underwriting based on reasonable repayment terms and is adequately secured; and all necessary loan documentation has been properly and accurately prepared and filed; (iv) the Bank has performed a comprehensive credit analysis indicating that the borrower has the willingness and ability to repay the debt as supported by an adequate workout plan, as necessary; and (v) the board of directors or its designated committee reasonably believes that the extension of credit will not impair the Bank's interest in obtaining repayment of the already outstanding credit and that the extension of credit or renewal will be rep aid according to its terms. The written certification shall be made a part of the minutes of the meetings of the board of directors or its committee, as appropriate, and a copy of the signed certification, together with the credit analysis and related information that was used in the determination, shall be retained by the Bank in the borrower's credit file for subsequent supervisory review. For purposes of this Agreement, the term "related interest" is defined as set forth in Section 215.2(n) of Regulation 0 of the Board of Governors (12 C.F.R. § 215.2(n)).

 

5.                        (a)           Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank and the Bureau an acceptable written plan designed to improve the Bank's position through repayment, amortization, liquidation, additional collateral, or other means on each loan or other asset in excess of $2.5 million, including other real estate owned ("OREO"), that: (i) is past due as to principal or interest more than 90 days as of the date of this Agreement; (ii) is on the Bank's problem loan list; or (iii) was adversely classified in the Reports of Examination. In developing the plan for each loan, the Bank shall, at a minimum, rev iew, analyze, and document the financial position of the borrower, including source of repayment, repayment ability, and alternative repayment sources, as well as the value and accessibility of any pledged or assigned collateral, and any possible actions to improve the Bank's collateral position.

 

          (b)    Within 30 days of the date that the Bank acquires OREO or that any additional loan, relationship, or other asset in excess of $2.5 million including OREO, becomes past due as to principal or interest for more than 90 days, is on the Bank' s problem loan list, or is adversely classified in any subsequent report of examination of the Bank,

the Bank shall submit to the Reserve Bank and the Bureau an acceptable written plan to improve the Bank's position on such loan, relationship, or asset.

 

 

Allowance for Loan and Lease Losses

 

6.                      (a)               Within 10 days of this Agreement, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified "loss" in the Reports of Examination that have not been previously collected in full or charged off. Thereafter the Bank shall, within 30 days from the receipt of any federal or state report of examination, charge off all assets classified "loss" unless otherwise approved in writing by the Reserve Bank and the Bureau.

 

(b)              Within 60 days of this Agreement, the Bank shall review and revise its ALLL methodology consistent with relevant supervisory guidance, including the Interagency Policy Statements on the Allowance for Loan and Lease Losses, dated July 2, 2001 (SR 01-17 (Sup)) and December 13, 2006 (SR 06-17), and the findings and recommendations regarding the ALLL set forth in the Reports of Examination, and submit a description of the revised methodology to the Reserve Bank and the Bureau. The revised ALLL methodology shall be designed to maintain an adequate ALLL and shall address, consider, and include, at a minimum, the reliability of the Bank's loan grading system, the volume of criticized loans, concentrations of credit, the current level of past due and nonperforming loans, past loan loss experience, evaluation of probable losses in the Bank's loan portfolio, including adversely classified loans, and the impact of market conditions on loan and collateral valuations and collectability.

 

(c)             Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank and the Bureau an acceptable written program for the maintenance of an adequate ALLL. The program shall include policies and procedures to ensure adherence to the revised ALLL methodology and provide for periodic reviews and updates to the ALLL methodology, as appropriate. The program shall also provide for a review of the ALLL by the board of directors on at least a quarterly calendar basis. Any deficiency found in the ALLL shall be remedied in the quarter it is discovered, prior to the filing of the Consolidated Reports of Condition and Income, by additional provisions. The board of directors shall maintain written documentation of its review, including the factors co nsidered and conclusions reached by the Bank in determining the adequacy of the ALLL. During the term of this Agreement, the Bank shall submit to the Reserve Bank and the Bureau, within 30 days after the end of each calendar quarter, a written report regarding the board of directors' quarterly review of the ALLL and a description of any changes to the methodology used in determining the amount of ALLL for that quarter.

 

 

7.            Within 60 days of this Agreement, Bankshares shall submit to the Reserve Bank and the Bureau an acceptable written plan to maintain sufficient capital at Bankshares, on a consolidated basis, and Bankshares and the Bank shall jointly submit to the Reserve Bank and the Bureau an acceptable written plan to maintain sufficient capital at the Bank, as a separate legal entity on a stand-alone basis. These plans shall, at a minimum, address, consider, and include:

 

(a)            Bankshares' current and future capital needs, including compliance with the Capital Adequacy Guidelines for Bank Holding Companies: Risk-Based Measure and Tier 1 Leverage Measure, Appendices A and D of Regulation Y of the Board of Governors (12 C.F.R. Part 225, App. A and D);

(b)   the Bank's current and future capital needs, including compliance with the Capital Adequacy Guidelines for State Member Banks: Risk-Based Measure and Tier 1 Leverage Measure, Appendices A and B of Regulation H of the Board of Governors (12 C.F.R. Part 208, App. A and B);

 

 

           (e)    the requirements of Section 225.4(a) of Regulation Y of the Board of Governors (12 C.F.R. § 225.4(a)) that Bankshares serve as a source of strength to the Bank.

 

8.            Bankshares and the Bank shall notify the Reserve Bank and the Bureau, in writing, no more than 30 days after the end of any quarter in which any of Bankshares' consolidated capital ratios or the Bank's capital ratios (total risk-based, Tier 1 risk-based, or leverage) fall below the approved capital plan's minimum ratios. Together with the notification, Bankshares and the Bank shall submit an acceptable written plan that details the steps Bankshares or the Bank, as appropriate, will take to increase Bankshares' or the Bank's capital ratios to or above the approved capital plan's minimums.

 

 

 

 

(b)          Within 30 days of this Agreement, the Bank shall submit to the Reserve Bank and the Bureau an acceptable written plan for reducing its reliance on brokered deposits. The plan shall detail the current composition of the Bank's brokered deposits by maturity and explain the means by which such deposits will be paid at maturity.

 

 

 

(b)           A strategic plan and budget for each calendar year subsequent to 2010 shall be submitted to the Reserve Bank and the Bureau at least 30 days prior to the beginning of that calendar year.

 

13.          (a)           Bankshares and the Bank shall not declare or pay any dividends without the prior written approval of the Reserve Bank, the Director of the Division of Banking Supervision and Regulation of the Board of Governors ("Director") and the Bureau.

 

 

 

  (d)          All requests for prior approval shall be received at least 30 days prior to the proposed dividend declaration date, proposed distribution on subordinated debentures, and required notice of deferral on trust preferred securities. All requests shall contain, at a minimum, current and projected information, as appropriate, on the parent's capital, earnings, and cash flow; the Bank's capital, asset quality, earnings and loan loss reserve needs; and identification of the sources of funds for the proposed payment or distribution. For requests to declare or pay dividends, Bankshares and the Bank, as appropriate, must also demonstrate that the requested declaration or payment of dividends is consistent with the Board of Governors' Policy Statement on the P ayment of Cash Dividends by State Member Banks and Bank Holding Companies, dated November 14, 1985 (Federal Reserve Regulatory Service, 4-877 at page 4-323).

 

 

 

(b)           Bankshares shall not, directly or indirectly, purchase or redeem any shares of its stock without the prior written approval of the Reserve Bank and the Bureau.

 

 

                 16.    In appointing any new director or senior executive officer, or changing the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position, Bankshares and the Bank shall comply with the notice provisions of Section 32 of the FDI Act (12 U.S.C. § 1831i) and Subpar t H of Regulation Y of the Board of Governors (12 C.F.R. §§ 225.71 et seq.).

 

               18.    (a)           Within 10 days of this Agreement, the boards of directors of Bankshares and the Bank shall appoint a joint committee (the "Compliance Committee") to monitor and coordinate the Bank's compliance with the provisions of this Agreement. The Compliance Committee shall include a majority of outside directors who are not executive officers or principal shareholders of Bankshares and the Bank, as defined in Sections 215.2(e)(1) and 215.2(m)(1) of Regulation 0 of the Board of Governors (12 C.FR. §§ 215.2(e)(1) and 215.2(m)(1)). At a minimum, the Compliance Committee shall meet at least monthly, keep detailed minutes of each meeting, and report its findings to the board of directors of the Bank.

 

   (b)           Within 30 days after the end of each calendar quarter following the date of this Agreement, Bankshares and the Bank shall submit to the Reserve Bank and the Bureau written progress reports detailing the form and manner of all actions taken to secure compliance with this Agreement and the results thereof.

 

19.            (a)           The Bank, and as applicable, Bankshares, shall submit written plans and a program that are acceptable to the Reserve Bank and the Bureau within the applicable time periods set forth in paragraphs 3, 5(a), 5(b), 6(c), 7, 8, 9, 10(b), and 15(a) of this Agreement.

 

 

 

 

20.          All communications regarding this Agreement shall be sent to:

 

       (a)   A. Linwood Gill, III

                                               Vice President

                                               Federal Reserve Bank of Richmond

                                               P.O. Box 27622

                                               Richmond, VA ###-###-####

 

                                             Deputy Commissioner

                                             Virginia Bureau of Financial Institutions

                                             P.O. Box 640

                                             Richmond, VA ###-###-####

 

         (c)   John A.B. Davies

                                             President and Chief Executive Officer

                                             Hampton Roads Bankshares, Inc.

                                             Bank of Hampton Roads

                                             999 Waterside Drive, Suite 2000

                                             Norfolk, VA 23510

 

           21.          Notwithstanding any provision of this Agreement, the Reserve Bank and the Bureau may, in its sole discretion, grant written extensions of time to Bankshares and the Bank to comply with any provision of this Agreement.

 

22.          The provisions of this Agreement shall be binding upon Bankshares and the Bank and their institution-affiliated parties, in their capacities as such, and their successors and assigns.

          23.          Each provision of this Agreement shall remain effective and enforceable until stayed, modified, terminated, or suspended in writing by the Reserve Bank and the Bureau.

24.          The provisions of this Agreement shall not bar, estop, or otherwise prevent the Board of Governors, the Reserve Bank, the Bureau, or any other federal or state agency from taking any other action affecting Bankshares, the Bank, or any of their current or former institution-affiliated parties and their successors and assigns.

  25.            Pursuant to Section 50 of the FDI Act (12 U.S.C. § 1831aa), this Agreement is enforceable by the Board of Governors under Section 8 of the FDI Act (12 U.S.C. § 1818).

 

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the 9th day of  June, 2010.